Analysis of Financial Statements
Referring to the above income statement, we find that since the start up, the revenue figures of the company has consistently increased with the revenue for Quarter 4 surging high by 144.4%. However, the profit margins of the company are not so encouraging, in fact despite of such a significant rise in the revenue figures, the company ended the latest quarter under the loss of -$3011373 and EPS of -$33/ share.
An in-depth insight of the company’s income statement reveals that although the revenue figures of the company has been increasing, but it is not able to apply cost effectiveness into its operations. For Instance, during Quarter 3rd, the company managed to pull out of losses and recorded a net profit of $872110. An year later, the company though managed to increase its revenue figures but the profit margins were eroded from the operating expenses that were nine (9) times the previous year.
Balance Sheet
Analysis
Referring to the balance sheet of the company, we find that since the startup, the asset base of the company has been increasing consistently from $1607598 in Q1 to $6015297 in Q4. However, the increase does not seems sustainable as although there is no debt financing present in the capital structure of the company, but the equity proportion has been increasing significantly with latest surge from $4 Million to $9 Million in Q4. This indicates the company is ignoring the fact that it is going through extensive dilution that may hamper its growth later on. Thus, since the assets are financed through equity issues and not be retained earnings, we have a doubt over the financial survival of the company.
Cash Flow Statement
Analysis
The cash flow statement of the company just re-iterates the points that we analyzed in the previous discussion. The CFO of the company which was pulled up from negative cash flow in Q2 to positive cash flow in Q3 again transformed into negative cash flow because of high operating expenses registered during Q4.
As for CFI, we witness that during Q2 and Q3, the company continued to invest in its fixed asset base with the amount increasing from $1.1 Million to $2.2 Million in Q4. However, as we discussed before, all the expenditure was financed through equity issue that was the only constituent of financing activities and major source of cash reserves over all the quarters.
Strengths and Weakness
In order to analyze the strengths and weakness of the company, we will use the tool of ratios which we will compare with the industrial averages.
Strength
i) Ability to increase revenue figure
The foremost strength of the company is its ability to increase revenue figures consistently. This indicates that the customers are accepting and ready to buy the product and if the company maintains similar production standards and sales efforts, it may not witness any fall in the revenue figures. In addition, the latest revenue figure of the company, i.e. $11744450 is the highest among the industry peers which range at the average of $7355999.
ii) Controlled cost of revenue:
Another noteworthy point in the financial performance of the company is the increasing gross margins courtesy controlled cost of revenues. During Q3 and Q4, the cost of revenue stood constant at 42% despite of a significant rise in the revenue figures by 144%.
Weakness
i) High proportion of operating expenses
The ever increasing operating expenses of the company are the only source of financial disaster which we have witnessed in the financial performance of the company and have largely decreased the net profit margins. During the latest quarter Q4, the net margin of the company was -25.35% which was significantly lower than the industrial average of -75.82%.
Financial Strategy
On the basis of the above analysis, we can infer that the company needs to consider its costing policies and should aggressively try to reduce its operating expenses as in the environment of increasing revenue and gross margins, only such action would turn savior for it and it won’t need to rely extensive on equity financing for its asset base.
